Note: This is just one in a series of articles talking about my top picks for 2020. I encourage you to check out my other top picks under the "Trade Ideas" tab and look for the "Top ETF Picks For 2020" heading!
Commodities are at 50-year lows relative to equities. Of course, you could have said that at just about any point over the past five years and the commodities-to-equities ratio just kept dropping.
So what makes 2020 the year that things might finally start turning around?
The key could be inflation and the slowing global economy, two factors which really haven’t been a big concern up until 2019. Natural gas is still about 75% off of its 2014 high. Crude oil is nearly 50% off of its 2011 high. Silver is down 60%.
But commodities prices have been on the rise again. Tensions with Iran in the Middle East, while potentially just short-term in nature, establish an air of uncertainty over how a protracted standoff could impact the trade markets.
Middle Eastern economies are heavily dependent on oil production and being able to export it in order to thrive. If Iran takes steps to limit that access to the rest of the world, it could drive up crude prices significantly.
The U.S. is much less dependent now than it has in the past to foreign oil, so it's possible the net effect could be more muted globally.
Perhaps the more important factor is the inflation rate.
While the Fed’s preferred inflation measure, the personal consumption expenditure price index, is up just 1.3% year-over-year, the U.S. CPI and core CPI rates are both over 2%. If inflation keeps ticking up (and personal income and spending numbers suggest it can), expect commodities prices to tick up as well. WTI crude is at $62 per barrel with OPEC production cuts extended into 2020. The foundation is in place for the rise to continue.
As the graphic above indicates, commodities prices rise rapidly as bubbles begin deflating. I think the Fed is determined to make sure that doesn’t happen, especially heading into an election year, but this group is certainly long overdue for an extended period of outperformance relative to stocks.
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